Overview

Established in 1974 as a truck body manufacturer, Supreme Industries, Inc., through its wholly-owned subsidiary Supreme Corporation, is one of the nation's leading manufacturers of specialized commercial vehicles. Utilizing a nationwide direct sales and distribution network, as well as manufacturing and service facilities in 10 states across the continental United States, Supreme is able to meet the needs of customers across all of North America.

The Company engages principally in the production and sale of customized truck bodies, shuttle buses, and other specialty vehicles. Building on its expertise in providing both cargo and passenger transportation solutions, the Company's specialty offerings include products such as customized armored vehicles, homeland response vehicles, portable storage units, and luxury motor coaches. Through vertical integration and proprietary processes, the Company also is a producer of high quality fiberglass and fiberglass-reinforced components.

The Company and its product offerings are sensitive to various factors which include, but are not limited to, economic conditions, interest rate fluctuations, volatility in the supply chain of vehicle chassis and the availability, or lack thereof, of credit and financing to the Company, our vendors, dealers, or end users. Though we can give no assurance of the success of our efforts, the Company is attempting a variety of strategies to mitigate any chassis supply disruption from the original equipment manufacturers, particularly General Motors which recently emerged from bankruptcy. The Company's business is also affected by the availability and costs of certain raw materials that serve as significant components of its product offerings. The Company's risk factors are disclosed in Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 27, 2008 and herein in Item 1A.

The following discussion should be read in conjunction with the unaudited consolidated financial statements and related notes thereto elsewhere in this document.

Results of Operations

Supreme continued to experience the impact of the economic recession particularly in its core truck business and motorhome operations. Management began executing a strategy in 2008 to navigate through these conditions and position the Company to emerge from the current economic environment even stronger. Throughout 2009, management has remained focused on executing this strategy.

During the second quarter of 2009, management continued to reduce costs in an attempt to right-size our operations to match the current market conditions. Despite the continued recession in the commercial vehicle market, we reduced our operating loss by nearly 50% for the second quarter of 2009, when compared to the first quarter of 2009, on relatively comparable sales quarter-over-quarter. A large component of our cost reduction initiatives resulted from a 29%

headcount reduction year-over-year. The Company continues to review its cost structure and will adjust the scale of operations as economic conditions warrant.

Supreme's bus and armored business has helped to partially offset the decline in the core dry freight truck business. To meet anticipated increased customer demand for our bus segment, the Company has recently expanded its bus capacity on both the East and West coasts to better serve these markets. Sales order backlog for both the bus and armored divisions remains strong and we anticipate positive demand for these product lines for the remainder of the year.

Additionally, the Company's focus on our asset management strategy continues as evidenced by our debt-to-equity ratio which improved by approximately 40% since the beginning of the year, along with an overall long-term debt level decrease of $13.6 million, or 42%.

Net Sales

Net sales for the three months ended June 27, 2009 decreased $25.7 million to $49.6 million compared to $75.3 million for the three months ended June 28, 2008. Net sales for the six months ended June 27, 2009 decreased $52.3 million to $98.9 million compared to $151.2 million for the six months ended June 28, 2008. The decrease in net sales for the three and six months was primarily related to our truck body sales, our largest product group, which declined by $23.9 million and $44.9 million, respectively. Our StarTrans bus division and our motorhome division experienced declines in net sales of $2.6 million and $1.0 million, respectively, for the three months ended June 27, 2009. For the six months ended June 27, 2009, our StarTrans bus division and our motorhome division experienced declines in net sales of $7.4 million and $4.8 million, respectively, when compared to the prior periods. Our vertically-integrated composites division experienced declines in net sales of $1.5 million and $2.5 million for the three and six months ended June 27, 2009, respectively. Partially offsetting these decreases was an increase in net sales by our armored division of $3.4 million and $7.2 million, respectively, for the three and six months.

The following table presents the components of net sales and the changes from period-to-period:

                             Three Months Ended                             Six Months Ended
($000's          June 27,    June 28,                          June 27,    June 28,
omitted)           2009        2008            Change            2009        2008            Change
Specialized
vehicles:
Trucks           $  25,095   $  48,983   $ (23,888 )  -48.8 %  $  51,539   $  96,401   $ (44,862 )  -46.5 %
Buses               16,656      19,304      (2,648 )  -13.7 %     30,675      38,123      (7,448 )  -19.5 %
Armored
vehicles             4,348         965       3,383    350.6 %     10,491       3,266       7,225    221.2 %
Motorhomes           2,135       3,164      (1,029 )  -32.5 %      2,786       7,585      (4,799 )  -63.3 %
                    48,234      72,416     (24,182 )  -33.4 %     95,491     145,375     (49,884 )  -34.3 %
Composites           1,371       2,891      (1,520 )  -52.6 %      3,386       5,856      (2,470 )  -42.2 %
                 $  49,605   $  75,307   $ (25,702 )  -34.1 %  $  98,877   $ 151,231   $ (52,354 )  -34.6 %

We attribute the decrease in our truck product sales to the economic recession which resulted in an industry-wide decline in the retail truck market. As a result of these market conditions, our retail and major fleet customers ordered fewer units resulting in a revenue decrease of 49% for the quarter and 47% for the six months when compared to 2008. The decline in the truck market began in early 2007, and the current prevailing industry expectation is that this market may begin to stabilize at the earliest during late 2009, though we can give no assurances this will occur.

Our StarTrans bus division continues to experience strong demand for its products resulting from the availability of funds from the recent Federal economic stimulus package and increased use of less expensive public transportation. With our recently expanded capacity and our strong backlog for this segment, we anticipate favorable contributions for the remainder of 2009 and into 2010.

The armored division sales increase was primarily the result of our previously announced armored Suburban contract with the Department of State (DOS). We believe that the armored division is well positioned to increase its revenue year-over-year for the remainder of 2009 due to the DOS contract and the positive feedback we are receiving from other governmental agencies regarding our products and quality.

The decrease in composite sales of fiberglass reinforced plywood and other fiberglass products is due to the overall decline in the commercial truck and recreational vehicle markets.

Our total sales backlog was $61.2 million at June 27, 2009 compared to $73.6 million at June 28, 2008.

Cost of sales and gross profit

Gross profit decreased by $3.8 million, or 51.4%, to $3.6 million for the three months ended June 27, 2009 compared to $7.4 million for the three months ended June 28, 2008. For the six months ended June 27, 2009, gross profit decreased by $8.6 million, or 57.3%, to $6.4 million compared to $15.0 million for the six months ended June 28, 2008. The following table presents the components of cost of sales as a percentage of net sales and the changes from period-to-period:

                     Three Months Ended                Six Months Ended
                June 27,   June 28,   Percent    June 27,   June 28,   Percent
                  2009       2008     Change       2009       2008     Change
Material            59.9 %     57.7 %     2.2 %      59.1 %     57.5 %     1.6 %
Direct Labor        13.6       14.0      (0.4 )      13.8       14.0      (0.2 )
Overhead            17.0       15.5       1.5        18.4       15.8       2.6
Delivery             2.2        3.0      (0.8 )       2.2        2.8      (0.6 )
Cost of sales       92.7       90.2       2.5        93.5       90.1       3.4
Gross profit         7.3 %      9.8 %    (2.5 )%      6.5 %      9.9 %    (3.4 )%

Material - Material cost as a percentage of net sales increased for the three and six months ended June 27, 2009 when compared to the corresponding periods in 2008. The change in the material percentage is primarily related to changes in our product mix as a result of increased sales in our bus division, which has a higher material percentage, and accounted for 33.6% and 31.0% of our total net sales for the three and six months in 2009 compared to 25.6% and 25.2% for the same periods in 2008, respectively. The material percentage for trucks remained relatively consistent from period-to-period.

Raw material costs have recently stabilized and have even begun to decrease for certain commodities, particularly for aluminum, steel, and petroleum-based products. The Company closely monitors all major commodities and is continually reviewing the financial viability of its primary vendors. We also strive to reduce manufacturing costs

through the use of improved technologies, processes, and supply chain management tactics and strategies.

Direct Labor - Direct labor as a percentage of net sales decreased slightly for the three and six months ended June 27, 2009 when compared to the corresponding periods in 2008. The slight decrease in the direct labor percentage was the result of efficiencies gained from using internal labor versus temporary labor as we have typically done to produce large fleet orders. Historically, the labor percentage increases from startup training costs. However, due to the reduction in fleet and retail orders for 2009 and the availability of experienced workers, the labor percentage decreased for both periods.

Overhead - Overhead as a percentage of net sales increased for the three and six months ended June 27, 2009 when compared to the corresponding periods in 2008. The majority of the increase in the overhead percentage was due to the fixed nature of certain expenses that do not fluctuate when sales volume changes. Additionally, group health insurance expense was higher than anticipated for both periods as a result of a few high dollar claims. In an effort to control future claim costs, the Company continues to implement changes to its employee health insurance plan design with a focus on preventive care. We continue to focus on reducing expenses and managing our overhead cost structure based on sales volume levels.

Delivery - Delivery as a percentage of net sales decreased for the three and six months ended June 27, 2009 when compared to the corresponding period in 2008. The Company continues to research and utilize more cost-effective delivery methods to reduce the adverse impact of high fuel costs.

Selling, general and administrative expenses

Selling, general and administrative ("G&A") expenses decreased by $1.6 million, or 22.9%, to $5.4 million for the three months ended June 27, 2009 compared to $7.0 million for the three months ended June 28, 2008. For the six months ended June 27, 2009, selling, general and administrative expenses decreased by $2.8 million, or 20.0%, to $11.2 million compared to $14.0 million for the six months ended June 28, 2008. The following table presents selling and G&A expenses as a percentage of net sales and the changes from period-to-period:

                                 Three Months Ended                                  Six Months Ended
                      June 27,        June 28,                          June 27,          June 28,
($000's omitted)        2009            2008            Change            2009              2008            Change
Selling expenses   $ 1,859    3.7 % $ 2,768   3.7 % $   (909 )   - % $  3,930    4.0 % $  5,188   3.4 % $ (1,258 ) 0.6 %
G&A expenses         3,523    7.1     4,273   5.6       (750 ) 1.5      7,253    7.3      8,802   5.9     (1,549 ) 1.4
Total              $ 5,382   10.8 % $ 7,041   9.3 % $ (1,659 ) 1.5 % $ 11,183   11.3 % $ 13,990   9.3 % $ (2,807 ) 2.0 %

Selling expenses - Selling expenses declined for the three and six months end June 27, 2009 when compared to corresponding periods in 2008. The decrease is a result of lower commission expense, selling wages, and employee-related expenses due to lower sales volumes and several proactive cost reduction efforts. These declines were partially offset by fewer cooperative marketing credits the Company received from chassis manufacturers. These credits, determined solely by programs established by the chassis manufacturers, are used to offset marketing and promotional expenses.

G&A expenses - General and administrative expenses decreased for the three and six months ended June 27, 2009 when compared to corresponding periods in 2008. The decrease was primarily attributable to headcount and wage reductions which are a large part of our cost savings initiatives which began in late 2008.

Other income

For the three months ended June 27, 2009, other income was $0.4 million (0.8% of net sales) compared to $0.3 million (0.4% of net sales) for the three months ended June 28, 2008. For the six months ended June 27, 2009, other income was $0.7 million (0.7% of net sales) compared to $0.5 million (0.3% of net sales) for the six months ended June 28, 2008. Other income consisted of rental income, gain on sale of assets, and other miscellaneous income received by the Company through its various business activities.

Interest expense

Interest expense was $0.6 million (1.2% of net sales) for the three months ended June 27, 2009 compared to $0.5 million (0.7% of net sales) for the three months ended June 28, 2008. Interest expense remained relatively flat at $1.2 million (1.2% of net sales) and $1.1 million (0.7% of net sales) for the six months ended June 27, 2009 and June 28, 2008, respectively. Interest expense reflects lower prevailing LIBOR and prime interest rates coupled with reduced debt levels due to lower working capital requirements. This was offset by higher performance-based pricing provisions under the Company's credit facility as recent operating losses triggered an increase in rate.

Income taxes

The Company's estimated effective income tax rate was favorably impacted by tax benefits associated with the Company's wholly-owned captive insurance subsidiary, federal alternative fuel tax credits, and research and development tax credits. The combination of these tax benefits along with the incurred pretax losses resulted in an overall tax benefit position for the Company in each of the 2009 and 2008 periods presented. The Company is estimating a 52.0% effective tax rate for the year ending December 26, 2009. The effective tax rate for the year ended December 27, 2008 was 41.5%. The increase in the effective tax rate is due to the fixed nature of the noted tax benefits along with the estimated pretax loss for the full year ending December 26, 2009.

Net income (loss) and earnings (loss) per share

Net income decreased by $1.3 million to ($1.1 million) (-2.2% of net sales) for the three months ended June 27, 2009, from $0.2 million (0.3% of net sales) for the three months ended June 28, 2008. For the six months ended June 27, 2009, net income was ($2.5 million) (-2.5% of net sales) compared to $0.4 million (0.3% of net sales) for the six months ended June 28, 2008. The following table presents basic and diluted earnings (loss) per share and the changes from period-to-period:

                                    Three Months Ended                    Six Months Ended
                             June 27,     June 28,                June 27,     June 28,
                               2009         2008       Change       2009         2008       Change
Earning (loss) per share:
Basic                       $    (0.08 ) $     0.02   $  (0.10 ) $    (0.18 ) $     0.03   $  (0.21 )
Diluted                     $    (0.08 ) $     0.02   $  (0.10 ) $    (0.18 ) $     0.03   $  (0.21 )

Liquidity and Capital Resources

The Company believes that it has adequate availability in its credit facility to finance future foreseeable working capital requirements. The Company's cash management system and revolving line of credit are designed to maintain zero cash balances and, accordingly, checks outstanding in excess of bank balances are classified as additional borrowings under the revolving line of credit.

The Credit Agreement provides for a revolving line of credit facility of up to $30 million and which increases to $33 million during the period each year from January 1 to June 30. Interest on outstanding borrowings under the revolving line of credit is based on the bank's prime rate, or certain basis points above LIBOR, depending on the pricing option selected and the Company's leverage ratio. All borrowings under the Credit Agreement are secured by security interests covering certain inventories, trade receivables, and selected other assets of the Company. As of June 27, 2009, the Company had $16.8 million utilized under its credit facility.

The Credit Agreement contains, among other matters, requirements for compliance with certain financial covenants. During the quarter ended June 27, 2009, Supreme Corporation, the Company's wholly-owned subsidiary, was not in compliance with the earnings-related covenant. However, the Company obtained a waiver from its lender and is in the process of resetting certain existing covenant measurements to provide temporary relief during the ongoing recession. Effective May 12, 2009, the credit facility maturity date was extended an additional 180 days to July 31, 2010, and as a result all borrowings under the credit facility at June 27, 2009 are classified as long-term debt.

Operating activities

Operating activities provided $13.4 million of cash for the six months ended June 27, 2009 compared to cash provided of $3.5 million for the six months ended June 28, 2008. Through the second quarter of 2009, cash provided by operating activities was favorably impacted by a $4.8 million reduction in accounts receivable, an $8.2 million decrease in inventories, and an increase in accounts payable of $3.6 million. This was offset by a $2.2 million decrease in other accrued liabilities and an increase in other current assets of $0.6 million. Net income (loss), adjusted for depreciation and amortization, resulted in negative cash flows of $0.4 million and generated positive cash flows of $2.6 million during the first half of 2009 and 2008, respectively.

Investing activities

Cash used in investing activities was $0.7 million for the six months ended June 27, 2009 compared to $2.3 million for the six months ended June 28, 2008. Capital expenditures for the first half of 2009 were $1.3 million and consisted primarily of machinery to improve efficiencies

at our armored truck division. The Company expects and intends to invest primarily in replacement equipment for the remainder of 2009.

Financing activities

Financing activities used $13.6 million of cash for the six months ended June 27, 2009 compared to cash used of $2.4 million for the six months ended June 28, 2008. The lower level of bank borrowing for the first half of the year primarily occurred as a result of the decrease in accounts receivable and inventory levels due to lower sales and production levels. Due to the present industry conditions and ongoing economic recession, the Board of Directors has decided to suspend its dividend program. Future dividends will necessarily be subject to business conditions, the Company's financial position, and requirements for working capital, property, plant, and equipment expenditures, and other corporate purposes.

Critical Accounting Policies and Estimates

Management's discussion and analysis of its financial position and results of operations are based upon the Company's consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company's significant accounting policies are discussed in Note 1 of the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 27, 2008. In management's opinion, the Company's critical accounting policies include revenue recognition, allowance for doubtful accounts, excess and obsolete inventories, inventory relief, accrued insurance, and accrued warranty.

Revenue Recognition - The Company generally recognizes revenue when products are shipped to the customer. Revenue on certain customer requested bill and hold transactions is recognized after the customer is notified that the products have been completed according to customer specifications, have passed all of the Company's quality control inspections, and are ready for delivery based on established delivery terms.

Allowance for Doubtful Accounts - The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required which would adversely affect our future operating results.

Excess and Obsolete Inventories - The Company must make estimates regarding the future use of raw materials and finished products and provide for obsolete or slow-moving inventories. If actual product life cycles, product demand, and/or market conditions are less favorable than those projected by management, additional inventory write-downs may be required which would adversely affect future operating results.

Inventory Relief - For monthly and quarterly financial reporting, cost of sales is recorded and inventories are relieved by the use of standard bills of material adjusted for scrap and other estimated factors affecting inventory relief. Because of our large and diverse product line and the customized nature of each order, it is difficult to place full reliance on the bills of material for accurate relief of inventories. Although the Company continues to refine the process of creating accurate bills of materials, manual adjustments (which are based on estimates) are necessary in an effort to assure correct relief of inventories for products sold. The calculations to estimate costs not captured in the bill of materials take into account the customized nature of products, historical inventory relief percentages, scrap variances, and other factors which could impact inventory relief.

The accuracy of the inventory relief is not fully known until physical inventories are conducted at each of the Company's locations. We conduct semi-annual physical inventories at all locations and schedule them in a manner that provides coverage in each of our calendar quarters. We have invested significant resources in our continuing effort to improve the physical inventory process and accuracy of our inventory accounting system.

Accrued Insurance - The Company has a self-insured retention against product liability claims with insurance coverage over and above the retention. The Company is also self-insured for a portion of its employee medical benefits and workers' compensation. Product liability claims are routinely reviewed by the Company's insurance carrier, and management routinely reviews other self-insurance risks for purposes of establishing ultimate loss estimates. In addition, management must determine estimated liability for claims incurred but not reported. Such estimates, and any subsequent changes in estimates, may result in adjustments to our operating results in the future.

The Company utilizes a wholly-owned small captive insurance company to insure certain of its business risks. Certain risks, traditionally self-insured by the Company and its subsidiaries, are insured by the captive insurance subsidiary. The captive insurance subsidiary helps the Company manage its risk exposures and, under the Internal Revenue Code, the net underwriting income of such a small captive is not taxable.

Accrued Warranty - The Company provides limited warranties for periods of up to five years from the date of retail sale. Estimated warranty costs are accrued at the time of sale and are based upon historical experience.

Forward-Looking Statements

This report contains forward-looking statements, other than historical facts, which reflect the view of management with respect to future events. When used in this report, words such as "believe," "expect," "anticipate," "estimate," "intend," and similar expressions, as they relate to the Company or its plans or operations, identify forward-looking statements. Such forward-looking statements are based on assumptions made by, and information currently available to, management. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that the expectations reflected in such forward-looking statements are reasonable, and it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially

from such expectations include, without limitation, an economic slowdown in the specialized vehicle industry, limitations on the availability of chassis on which the Company's product is dependent, availability of raw materials, raw material cost increases, and severe interest rate increases. Furthermore, the . . .